7.20am: Hola! Yes, today's live coverage of the ongoing Greek debt crisis has a distinctly Spanish flavour, after Spain yesterday became the latest company to see its credit rating downgraded.

Will another country feel the wrath of Standard & Poor's? Will Germany agree a €120bn bailout for Greece? How will the stock markets react? We're about to find out.

7.27am: Here's a quick recap of yesterday's events to help anyone who is coming to this fresh:

Europe's financial crisis escalated yesterday, after Spain followed Greece and Portugal in seeing its credit rating downgraded by S&P. The mood was particularly dark in Berlin, where the International Monetary Fund and European Central Bank met with Angela Merkel to try and persuade Germany to support a massive rescue package for Greece.

Talks ended without agreement, but with Merkel musing that letting Greece into the eurozone in the first place was not the greatest idea in Europe's history.

There's now a real danger that Greece will leave the Euro, in an effort to rebuilt through devaluation. As this interactive shows, the big fear is that Europe's more vulnerable economies are going to fall like dominoes. First Ireland, then Italy, then the UK?

As for Greece, its borrowing costs are hitting record levels all the time. But as Nils Pratley points out, stock market traders are taking this in their stride.

7.53am: The Greek Tragedy is fighting for space with Gordon Brown's bigotgate gaffe on today's front pages. The consensus is that the Spanish downgrade shows that the financial contagion is spreading fast from Greece, and quite possibly heading our way.

• The Financial Times warned that Greek fire turns to Spanish fever. Like us, they picked up on the warning from the OECD that the crisis could spread like the ebola virus.

• The Daily Telegraph went with EMU domino fears as Spain downgraded. One particularly fine quote: "There are some senior figures who would like so see the gangrenous leg of Greece chopped off, to set an example. But they want to avoid leaving any German fingerprints on the blood-stained knife,"

• The Daily Mail line is that Hung parliament 'could tilt Britain into Greek-style financial turmoil'.

• In The Times, the headline was Spain hit as Greek 'illness' spreads over Europe. Their story signed off with a haiku from Herman Van Rompuy, President of the European Council:

The sun is rising/sleeping yet in Europe/still the same sun.

Translations welcome.

8.15am: Europe's stock markets are now open. Traders aren't hammering the sell button after the Spanish downgrade, but there's a mood of uncertainty in the City as we all await developments.

The FTSE 100 is down by a meagre 2 points at 5585. Spain's IBEX 35, which shed 3% in last-minute trading after S&P struck, rose 0.2% in early trading while the German DAX rose 0.4% before slipping back.

Steady as she goes, or traders simply not sure what to do?

The euro is hovering around $1.32 today, up from yesterday's one-year low of $1.313.

But how stable is the euro anyway? Nobel prize-winning economist Paul Krugman has written that his old faith that the European single currency was unbreakable has been shaken by the Greek crisis.

The Greek government cannot announce a policy of leaving the euro — and I'm sure it has no intention of doing that. But at this point it's all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling.

And if Greece is in effect forced out of the euro, what happens to other shaky members?

8.38am: "What's going on here?" demands Bloomberg TV as European share prices edge lower, then rally a tad. Isn't this supposed to be a crisis?

One factor is that a clutch of major European companies have come out with decent financial results, including BSkyB (thanks to demand for high-definition TV), German giant Siemens, and Spanish banking group Santander (whose profits have risen 6%).

So the sovereign debt market may be wobbling, but the corporate world is doing well? All this turbulence is a perfect buying opportunity, according to Michael Amey, UK porfolio manager for Pimco, the world's largest bond investor.

Amey was just interviewed on Bloomberg, and he warned that the UK's AAA rating could be under threat if Britain gets a hung parliament after next week's election.

Ratings agencies will look at how the new government behaves.

Pimco believes that a solid Cameron victory would reassure the City.

Markets would like a Tory victory as the Tories have the most aggressive fiscal plans, so if you're a fixed bond investor that's what you want to hear.

8.55am: Over in Athens, Greek bank shares are soaring by an average of 6.3%. That's pushed the overall Athens stock market up by over 3%.

There's a real mood of optimism that Greece's bailout will be agreed, especially following the talk of a €120bn bailout.

On the bond markets, the yield on Greek two-year government debt has fallen slightly to 17.8%. That's still a farcical rate for a country to be borrowing at, and reflects the likelyhood of either an orderly restructuring or a disorderly default. The five-year bond yield has fallen to 12.7%, and the 10-year is at 10.6%.

As David Buik of BGC Partners put it:

Spreads and yield are down – yes! – But they are still at catastrophic levels with little activity. Markets are very nervous. It may be that nothing decisive will be agreed by Germany until 7th May 2010! – That is TOO long!

Clearly the crisis is entering a calmer moment, as Bloomberg is now chatting about last night's football. They're concerned that José Mourinho's head will get too big if he wins another Champions League final.

9.22am: But even if Angela Merkel's government does agree to rescue the Greek economy, and pushes the deal through the Bundestag next week, it faces another threat - German economist Joachim Starbatty, who has pledged to oppose any deal through the courts.

Today, Starbatty has repeated his vow, telling Czech newspaper Mlada Fronta Dnes that he remains confident that the German courts would throw out the rescue package. He also claims to have support from across the German political spectrum:

We expect that the Federal Constitutional Court will not reject our suit, because our initiative has unbelievably big support.

Differences in opinion exist also in the governing CDU/CSU, but over the past weeks the support has strengthened substantially.

Starbatty is working with constitutional lawyers, but it is unclear how a court would handle his lawsuit. Given Greece's urgent need for funds, would they allow the bailout to proceed and then try and claw it back (in the event of a Starbatty victory), or block it?

Here's a taster of his piece, called Germany is kicking away props of global recovery:

The Germans are getting out of hand. First, they play a key role in causing the financial crisis. Then, just as the world starts to claw its way back to some kind of normality, they start kicking the props away.

This accusation is not about fighting the second world war again or inciting xenophobia, but a reality check on how those peace-loving, social-democratic Germans are selfishly jettisoning ailing European Union countries, starting with Greece, to maintain probably the richest, most all-embracing cradle-to-grave welfare state on the planet.

10.27am: There's a lot of anger in Europe towards Standard & Poor's today following its downgrade of Greece, Portugal and Spain this week. Is the solution to have a European ratings agency rather than being bullied by one based in New York?

Germany's Foreign Minister thinks so. Guido Westerwelle has just declared that the EU should "counter the work of rating agencies with efforts of its own."

His counterpart in the finance ministry, Wolfgang Schaeuble, has also taken a pop at the sector - suggesting that investors shouldn't take too much notice of them.

No market participant is prevented from not taking rating agencies too seriously.

It's not immediately clear that adding another agency alongside Moody's, Fitch and S&P would improve the situation. But Westerwelle also told the WAZ newspaper group that the whole business of ratings should be cleaned up, so that agencies could not develop, sell, and rate financial products all at the same time. He said such conflicts of interest must be ruled out.

This would all come on top of the existing measures being pushed through by Greek prime minister George Papandreou, which have prompted widespread strikes across the country in recent weeks. VAT, for example, was raised from 19% to 21% last month.

11.51am: We don't have as much breaking news for you today, alas, but we can offer some of the City's best analyst comment.

David Owen, chief European Financial Economist at Jefferies, has argued that the European Central Bank might have to learn a lesson from Mervyn King and plunge into quantitative easing:

To help with all the adjustment that is going to be necessary in the next three years (we are talking about a multi-year tightening in fiscal policy in many countries, not just Greece) would first, be a higher inflation rate and second, a much weaker euro. QE might help on both counts as well

This is from James Rutherford, chief investment officer at Hermes Sourcecap:

Many would hope that Greece is an isolated incident of a heavily indebted country that is unable to pay its way. Unfortunately, what is very apparent is that many European countries and financial institutions have an unfortunate exposure to the problems through holdings in the Greek bond market. This is not a Greek issue, but an European one.

Member countries of the Euro have, in effect, been sponsoring Greece's credit binge which has now brought Greek credit to junk status. Sovereign risk is very real and whilst the threat of member countries leaving the Euro is remote, what I think will happen is that you will now see a reversal in the cost of capital trends that were harmonised with the onset of the Euro. This will weigh on the ratings of stock prices in individual countries as domestic discount rates diverge because of differing levels of credit risk.

What the problems in Greece demonstrates is that while currencies might have been harmonized across the region with the introduction of the Euro, it does not mean that other forms of relative financial risk have similarly been eliminated, which should act as a warning to other countries with large levels of national borrowing and fiscal deficits.

There remain many great opportunities and times of macro fear brings indiscrimination which in turn throws up anomalies.

And Gary Jenkins of Evolution Securities has reflected on yesterday's mayhem:

I did find it quite laughable that Angela Merkel was quoted yesterday saying that the negotiations need to be "sped up". What have they all been doing for the last 4 months? Anyhow, it's not a done deal yet and even if it comes to fruition it does not necessarily cure all ills.

It would be a surprise if Greece did not get some kind of assistance although I still think that if they have not already done so the IMF should carry out a thorough investigation of the Greek numbers to clarify exactly what the budget deficit is and how much realistically Greece will need to borrow over the next couple of years, and if it is worth lending more money or whether it would be better to go straight to default. I do not quite understand the point of the likes of Portugal, Ireland, Italy and Spain lending money to Greece unless they are confident that they will be repaid.

12.20pm: There was a brief flurry of excitement then as reports came in from the Czech Republic about a suspected arson attack on the Greek Embassy in Prague.

The Associated Press has details:

A police spokeswoman says a fire caused by an unknown flammable substance that was hurled at the embassy's garden early Thursday damaged the entrance door before it was extinguished by firefighters. The embassy, which was closed at the time, says the damage was not serious. Police say they are investigating.

However, the early indications are that this isn't related to the bailout, but was probably the work of an anarchist group. They are protesting about the jailing of Giannis Dimitraki, a fellow activist, for his part in an attack on an Athens bank. Greece's embassy in Argentina was also attacked overnight, in an attempt to put pressure on Greece as it decides whether to release Dimitraki.

12.45pm: We're getting a surge of comments from Athens and Berlin, but still no deal!

Angela Merkel continues to take a tough line, saying that Germany will assist Greece as soon as it has met the conditions to overhaul its economy.

The word from Greece is also that negotiations continue. A government spokesman told reporters that "the talks are tough":

No-one can guarantee anything, we know how difficult the country's situation is.

Jean-Claude Trichet has also repeated the warning that Europe needs to arrange a deal for Greece now. The head of the ECB told the Munich Economic Summit that "we need a sense of direction" to get the eurozone out of the crisis. Trichet also refused to give any details of the ongoing talks.

EU commissioner Olli Rehn has also said that Europe expects to reach an agreement over Greece "within days".

1.08pm: Breaking news from Fitch, which just announced that it is maintaining its 'Stable' credit rating for Ireland.

Fitch said it was "comforted by the prospect of recession ending sooner than expected" in Ireland.

Ireland, of course, is one of the dominoes that could follow Greece, Spain and Portugal down the road of a credit downgrade.

David Mackie, chief European economist at JP Morgan Chase in London, predicted today that the cost of supporting Portugal, Ireland, Greece and Spain could hit €600bn!

This is a big number, but the region has the fiscal capacity to backstop both banks and these countries.

And with that, I'm off for a break (Shurely a siesta? Ed.), but we'll be back if events develop.